Many of the transit issuers in lease-back deals that face potentially huge termination fees because their guarantors' ratings have been downgraded have lowered their exposure to credit risks by unwinding or restructuring the transaction agreements, Moody's Investors Service found.
The rating agency detailed its findings in a
Moody's found that 17 of the 25 transit agencies have lower credit risk because none of their agreements are out of compliance with minimum rating thresholds or because the potential net termination payments are modest or manageable as a percentage of their available liquidity. The remaining eight issuers have higher risk because they face sizeable potential net termination amounts and in some cases have not unwound or restructured any of their agreements, Moody's said.
"Importantly, all contacted transit issuers have reported that no investors are presently demanding termination payments," the rating agency stressed in its report. Instead, investors typically have offered extensions either verbally or more formally, negotiated resolutions with minimal termination payments, or have not aggressively pursued payments, it said.
The existence of a SILO or LILO agreement does not necessarily warrant a downward rating action, but "risks to transit enterprises ... remain and should the environment shift, several issuers could face calls for termination payments that exceed their available liquidity, which could result in downward rating pressure," it said.
In these transactions, a transit agency sells or leases an asset such as transportation equipment to a private entity in exchange for an upfront payment. The private party writes off the depreciation costs of the equipment on its federal taxes while leasing the equipment back to the transit agency.
Most of these transactions involved guarantors such as American International Group Inc., whose rating was downgraded last year. The downgrades threw the deals into technical default, allowing investors to demand huge termination fees from the transit agencies.
But Moody's pointed to both a recent court action and transit agencies' pleas with Congress for help, saying the publicity may have dissuaded investors from seeking huge termination payments. The Washington Metropolitan Area Transit Authority was able to negotiate a favorable unwinding of its leaseback deal with KBC Bank NV after it sought an injunction from the U.S. District Court for the District of Columbia to prevent the bank from collecting a huge termination payment.
On Feb., 5, a coalition of transit agencies sent letters to leaders of the Senate Finance Committee urging them to permit the use of the Transportation Infrastructure Finance and Innovation Program to provide credit lines to replace or overlay the guarantees from downgraded guarantors.
Most of the transit agencies are taking one of two positions: they either want to unwind the transactions and are negotiating to do so or they want to keep the transactions in place and are pursuing that option.
The rating agency pointed to two issuers in the higher risk category that have taken actions since late last year to unwind their transactions. The Chicago Transit Authority entered into eight LILOs, only one of which currently requires the replacement of AIG as a guarantor, Moody's said. That agreement has three equity investors.
The CTA faced a $76 million exposure from the deal, but negotiated an exit from the transaction with one of its investors at essentially no cost, leaving the other two investors and a $62 million exposure.
"While this exposure nearly exceeds the CTA's approximately $70 million of available liquidity, the CTA expects to be able to replace AIG for a cost of below $10 million," Moody's said.
The report also cited the Metropolitan Atlanta Rapid Transit Authority, which was a participant in 19 SILOs and LILOs, 18 of which fell out of compliance with minimum rating thresholds.
"MARTA has exited one transaction at no cost and expects to resolve two others in the near future," the report said. "Current termination exposure is still a very sizeable $390 million, which exceeds $130 million of available liquidity" but the "anticipated resolution of the two additional transactions will, if successful, reduce the $390 million exposure to $132.5 million," Moody's said.
